The Bank of England is likely to voice deep concern about the rise in inflation on Thursday but will keep interest rates at a record low as a wave of Omicron coronavirus infections engulfs the UK, according to economists.
Although there has been a flurry of speculation in financial markets that the BoE’s Monetary Policy Committee might bite the bullet at midday and raise rates from 0.1 per cent to 0.25 per cent, most economists believe the majority of members will vote to hold fire.
Even the most hawkish members of the committee, including external member Michael Saunders, have suggested in the past that the new facts surrounding the virus might require a pause for additional thought.
With the labour market tight and inflation in November at 5.1 per cent, its highest level for a decade, the IMF has told the central bank to act and avoid “inaction bias”, but economists lined up on Wednesday to say the BoE would hold tight.
Krishna Guha, at Evercore ISI, said he was confident the BoE would delay a rate rise, which would “reflect the higher bar for rate tightening rather than quantitative easing tapering in terms of learning about Omicron and the balance of its demand and supply effects, along with the imposition of new activity restrictions in the UK”.
The Federal Reserve announced it would accelerate the pace at which it would wind down its asset purchases and forecast three rate rises next year after its meeting on Wednesday, in response to inflation rising to a multi-decade high in the US in November. The European Central Bank is also expected to announce a slowing of asset purchases at its meeting on Thursday.
In the UK, asset purchases are already scheduled to end by January and the focus had been on the next step of raising interest rates from the current level of 0.1 per cent in an attempt to cool spending and bring inflation lower.
Even though all the economic conditions for an interest rate rise set by the MPC after its November meeting have been met, the additional uncertainty of the Omicron variant has presented an opportunity for the BoE to wait until its next meeting in February.
Allan Monks, UK economist at JPMorgan, said the spread of the virus, with 78,000 reported cases on Tuesday, would pose an acute short-term risk to the economy. He expected this to be shortlived and so expected the MPC to be hawkish while it did nothing on rates.
“We expect the MPC tomorrow will retain language similar to November by stating that a rate rise is still likely to be needed in the coming months,” Monks said on Wednesday.
But with the economic data strong, a few economists sided with the financial market participants who were betting on a rate rise. George Buckley, chief UK and eurozone economist at Nomura, said: “We continue to think the bank will raise rates tomorrow to prepare the ground for more significant tightening next year.”
Source: Economy - ft.com
